With particularly high stakes, steps are necessary now to shore up supply chains.
As if COVID wasn’t enough to tangle supply chains up in knots, we have the ongoing uncertainty and disruption of war in eastern Europe. The repercussions have been, and will continue to be, particularly painful for middle market companies.
Jeffrey Korzenik, Fifth Third Bank’s Chief Investment Strategist, recently led a three-part event series focusing on the supply chain. The discussions examined where we’ve been and where we are going in three key areas: policy, agility, and reshoring. Several opportunities for Middle Market businesses were highlighted in each of these areas, and it is clear that companies’ thought processes, priorities, and actions must evolve to deliver the products and services customers want while meeting the financial expectations of the organization.
"Today, businesses need to reexamine every aspect of their supply chain and find an appropriate balance between short-term efficiency (profitability) and resiliency. Ultimately, a balance is needed for long-term profitability," noted Jeff Korzenik, Fifth Third’s Chief Investment Strategist.
Building on those ideas, let’s start with a look at transportation—long an afterthought in companies’ strategic decisions (including but not limited to sourcing, manufacturing, inventory, and sales / pricing), the run-up in ocean transportation costs and more recently, fuel surcharges, have laser-focused attention in this area.
The thinking had been that transportation would always be available: the cost may vary a bit seasonally and year to year, and while the extra expense may sting, it wasn’t going to be fatal.
If it seems like taking actions now to mitigate transportation costs are "too little, too late", consider that transportation costs are typically the largest supply chain cost component (even pre-COVID), and we are increasingly seeing service be unavailable—at any price—in some situations. So, what can you do about it? There are many levers that can be pulled but we’ll focus on two main actions that when done well, will pay dividends in both the short and long term.
Become Better Consumers of Transportation Services
Everyone in the organization should understand how they impact supply chain in general and transportation cost in particular. Here are a few examples:
- The salesperson who is making deals with the customer regarding an upcoming promotion—will the timing of shipping and delivery impact cost?
- The materials buyer who places orders with freight terms "prepay and add"—do the delivery requirements and order sizes minimize freight expense?
- The supply planner who plans replenishment shipments—do they allow enough time to optimize the mode?
- The shipping supervisor—do they understand the potential cost of delayed drivers, both short term (detention) and long term (being a non-preferred shipper)?
- Director of Sales policy & pricing—do order minimums and lead times enable efficient transportation?
If the answer to these questions is anything short of an unqualified "yes", then some education is in order. It is not necessary that everyone be an expert in transportation, but they do need to have a basic understanding of cost drivers and be able to ask the right questions.
Optimize Service Providers and Modes
Many of our customers are based or have a strong presence in the Chicago area and that is a significant advantage for many reasons, but let’s just look at it from a freight transportation perspective.
- Modal alternatives: In addition to trucks, Chicago offers rail, air, and water options. Could you move some (or more of your freight) via intermodal? Transit time may be a bit longer, but typically it will be less expensive and the "carbon footprint" is lighter than with trucks.
- World Business Chicago1 notes that there are just over 16,000 supply chain service providers in the area—the most of any metro area in the country. As such, the potential for identifying providers who can be a true partner where your business matters to them is high.
Optimizing service providers and modes is essential regardless of your operating base. That legacy mindset of "transportation will always be available" often translates to a view of transportation as a commodity whereby the business is bid regularly, and the lowest price gets the award.
The starting point is a thorough understanding / documenting of your service requirements including such factors as order lead time, temperature protection, loading / unloading parameters, technology (shipment tendering, payment, tracking), transit times / delivery windows, etc. Now look at each of these from the perspective of "what if" or "how might we" change one or more of these that would reduce cost and make the business more attractive to potential providers. Doing this right entails working across the organization to understand how changes in one area impact others and mitigating any negative effects. This is an on-going exercise: as the business changes, update your "specs" so you don’t pay for services you don’t need.
Turning next to service providers, look at your sourcing strategy. Do you have a mixture of freight contracts or are you using brokers / spot market exclusively to cover your shipments? While non-asset-based providers and the spot market can play a valuable role in a comprehensive strategy, relying on them entirely is not a long-term formula for success. In most cases, a better approach is to make contractual commitments with service providers for at least a baseline of business.
Moving further away from transportation as a commodity means looking at the relationship with service providers and positioning your company such that when they have multiple shipments but only one truck, they pick yours. So how do you become a "shipper of choice"? Since attracting and retaining drivers is the biggest challenge most carriers face, helping them do that is a good starting point. Do you or could you offer areas for drivers to use restrooms, get something to eat, and park for their break? Do you make it quick and easy to get in and out of your facility? Having a reputation as a shipper who respects drivers time will go a long way to ensuring your shipments get moved.
Finally, most of all businesses are going through intensive supplier / sourcing reviews with an eye on increasing resiliency—either by shortening supply lines, adding suppliers, or some combination of both. These analyses should include not just a current cost assessment, but sensitivity analysis to calculate at what transportation cost does it make more sense to change sourcing.
"For many decades, U.S. businesses enjoyed a huge cost benefit through globalization even at the expense of resiliency. Even before the pandemic, the value of that tradeoff was eroding," notes Korzenik.
The combination of labor and fuel challenges that are sure to persist ensure that transportation’s influence in supply chain performance is only going to increase. Winning companies will view transportation not as a commodity but as a constrained resource and build operating strategies accordingly.
For additional information, contact your Relationship Manager or Find a Banker to learn more.